Pennies Under Threat as Copper Price Surges

A penny simply is not worth what it used to be. With the rise of the value of copper over th e past few years, one US cent is costing the government more to produce than it is actually worth, and the W hite House is looking for ways to lower costs.

Of course, pennies are not solid copper. Instead, they have been merely copper-plated since 1982, with zinc making up 97.5 percent of the coin's mass. In fact, despite its silver sheen, the five-cent nickel has a higher copper content than the penny; three quarters of the coin is made up of copper, while the remaining quarter consists of nickel.

Metal prices impact penny cost

As a result, it cost 2.4 cents to make a penny in 2011, and 11.2 cents to make a nickel. "This contributes to volatile and negative margins on both the penny and nickel," the White House stated.

Through its proposed 2013 budget, under the section entitled "Increased Flexibility for the US Mint in Coinage," the Obama administration has asked Congress to allow the metal content in the coins to change, even though the US Mint has not yet identified what a more cost-effective mixture would be.

What is clear, though, is that the continued rise of industrial metal prices in recent years is having a direct impact on the coin industry, and with the persisting volatility in the copper market in particular, the current recipe for pennies may well benefit from using less of the red metal, according to some metal analysts. Moreover, it would not be the first time that the government has lowered the content of metals in its coins as a result of higher raw materials costs. The decision to change the penny formula in 1982 was precisely in reflection of higher commodities prices, while during World War II, there was brief period when pennies were made from zinc-coated steel in order to keep costs down.

Changing coin composition

Zinc may be an obvious fix to the current conundrum, but it would not be easy to implement. Firstly, regardless of whether more zinc is used or not, any change in metals composition will require a change in production setup at the Mint. That cost, though, could be offset by a decline in material costs.

Higher zinc content in pennies, though, would make the one cent coin much lighter, and may make it more difficult for machines to process them, which would affect the private sector. For instance, coin reading machine producer Coinstar reports that of the 46 billion coins it processed last year, over half were pennies.

Concerns

Other analysts are more wary of the administration being concerned about the cost of producing pennies in the first place.

"The fact that the government can no longer afford to mint token coins economically using copper is a sure sign of monetary debasement run wild," said Albert Lu, managing director and chief portfolio manager of Woodlands-based WB Wealth Management.

Nevertheless, there is no significant wave calling for the elimination of the penny as a currency unit altogether.

"There are many arguments for removal of the penny from circulation, all of which are predicated on continued inflation and devaluation of the dollar," said Peter Pham of AlphaVN.com, a Vietnam-based capital market investment services provider. The current zero interest rate policy of the Federal Reserve "only strengthens that argument. But since the amount of money at stake is so trivial, more money is likely being spent discussing the subject and generating reports on it than would be saved by their removal," he continued.

For now, though, junior miners may have an added incentive to develop copper mines. As the website Coinflation pointed out, "on the supply side, mining isn't keeping up with demand and the market has responded with higher prices."

Securities Disclosure: I, Shihoko Goto, hold no direct investment interest in any company mentioned in this article.